Dubai gold trade rises by 18%

A recent study Dubai Chamber of Commerce and Industry (DCCI) based on the Dubai Multi-Commodities Centre (DMCC) report indicates that the yellow metal traded through the Emirate valued US$ 41.3 billion in 2010, showing an increase of about 18% from 2009.

The study finds out that the Dubai Gold and Commodities Exchange (DGCX) gold trading has experienced healthy volumes as of May 2011 when gold contracts increased by 39% year-on-year to reach 60,638.

According to the DGCX report, gold contracts in April increased by 49% year-on-year to reach about 46,295 while in March they grew 51% year-on-year.

The study states that the Dubai Chamber membership database in 2010 showed the presence of 1,100 jewellery trading companies, seven gold and precious metal manufacturing companies, three gold refinery companies and four gold and precious metal testing labs. Other major players included importers and exporters of gold in the free-zones of Dubai, the DMCC and the DGCX.

In its UAE gold market overview for last year, the study shows that UAE's most important export markets for selected gold items were Malaysia, Turkey, Nepal for unwrought and semi-manufactured gold while Switzerland, UK and Singapore were also main export markets for gold jewellery. Malaysia, Turkey and Bahrain were among fastest growing export markets with compound annual growth rates (CAGR) from 2006-2010 of 89%, 63% and 20% respectively.

In terms of imports, major source markets included Turkey and Kyrgyzstan for gold and unwrought and semi-manufacture form and Malaysia and Singapore for jewellery items. The study informs that the UAE's fast growing import markets include Pakistan, Bahrain and Brazil.

The study also explores the challenges and prospects for the UAE gold market and the possible ways for the country's gold investors/traders to benefit from the opportunities, while protecting themselves from the trading risks associated with this precious metal. 

While gold is said to be less volatile to inflation, it has also been subject to price cycles that last many years. This is shown in figure 1, where an upward trend similar to the current one occurred in the 1970s. This was then followed up by large price declines in the early 1980s. Gold then fell to around US$ 252.80 per ounce in 1999 before setting a new high price of around US$ 1,549 per ounce in June 2011, a price about six times higher than the previous low.

The study indicates that price volatility of this magnitude is an important challenge for UAE gold investors and traders who need to make future business plans.

Citing the various causes of rising gold prices, the study attributes the rise to its increased use in jewellery, especially in growing markets such as India and China, demand for gold as reserve and hedge against inflation and investment and speculative demand for gold with the intention to profit from the continuing uptrend.

However, history has shown that asset prices generally don't keep rising indefinitely. Corrections, even large ones are quite normal as was seen in the early 1980s. While the price of gold may still have a long way to rise, its recent history has shown some difficulty in breaking through to higher levels. This could indicate that in the future the gold price may be more volatile, with more frequent and larger corrections.

The study further states that investment demand is not the only reason for the price rise of gold but due to higher demand for converting it into jewellery in countries like India and China as gold plays an important role in their cultures. Also, the wealth of these countries is increasing with the growth in their economies.

It cited estimates by the World Gold Council (WGC) that jewellery and investment demand from these Asian countries represented about 40% of total global demand in 2010 and also estimates that demand from India is expected to grow overtime.

Other countries in Asia, Africa and Latin America might also experience an increase in demand for gold as the economies of these countries grow, giving their residents more disposable incomes to purchase luxury items. From a sourcing point of view, UAE importers can look for suppliers of minerals, including gold, from Central Asia, Mongolia and Africa.

The study concludes by stating that the price volatility risk can be contained through long-term hedging. A more sustainable way is to create a business model where businesses can accommodate large price swings, perhaps by entering into long-term fixed price contracts with both suppliers and buyers.

UAE exporters must also look at expanding gold and jewellery exports to existing markets as well as new markets. Such measures could help investors take advantage of the current and future opportunities in the global gold market, while preparing them for the risks that may lie ahead.

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